Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractPast empirical research on monetary policy in open economies has found evidence of the 'delayed overshooting', the 'forward discount' and the 'exchange rate' puzzles. We revisit the effects of monetary policy on exchange rates by applying Uhlig's (2005) identification procedure that involves sign restrictions on the impulse responses of selected variables. We impose no restrictions on the exchange rate to leave the key question as open as possible. The sign restriction methodology avoids the "price puzzles" of the identification strategies used by Eichenbaum-Evans (1995) and by Grilli-Roubini (1995, which are particularly pronounced, when using an updated data set. We find that the puzzles regarding the exchange rates are still there, but that the quantitative features are different. In response to US monetary policy shocks, the peak appreciation happens during the first year after the shock for the US-German and the US-UK pair, and during the first two years for the US-Japan pair. This is consirably quicker than the three-year horizon found by Eichenbaum-Evans. There is a robust forward discount puzzle implying a large risk premium. We study this issue, introducing and calculating conditional Sharpe ratios for a Bayesian investor investing in a hedged position following a US monetary policy shock. For foreign monetary policy shocks, we find more robust results than with the Grilli-Roubini recursive identification strategy: the posterior distribution regarding the exchange reaction looks rather similar across countries and VAR specifications. In particular, we find that there seems to be considerable uncertainty regarding the initial reaction of the exchange rate. Quantitatively, monetary policy shocks seem to have a minor impact on exchange rate fluctuations.

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International Financial Institutions provide temporary balance-of-payment support contingent on the implementation of specific macroeconomic policies. While several emerging markets repeatedly used conditional assistance, sovereign defaults occurred. This paper develops a dynamic stochastic model of a small open economy with endogenous default risk and endogenous participation rates in bailout programs. Conditionality enters as a constraint on fiscal policy. In a quantitative application to Argentina the model mimics the empirical duration and frequency of bailout programs. In equilibrium, conditional bailouts generate high and volatile interest spreads. A Laffer-curve in conditionality reflects the trade-off between fostering fiscal reform and creating incentives for non-compliance.

This paper develops a stochastic dynamic politico-economic model of sovereign debt to analyze the interaction of sovereign default risk and political turnover. Two parties differ in their preferred size of public spending which is financed by taxes and external debt. Electoral outcomes are characterized by tradeoffs between the economic benefits from the incumbent's policies against idiosyncratic ideological aspects. Quantitative simulations replicate the typical empirical facts of emerging markets. Endogenous political turnovers increase the parties' discrepancies between debt and default policies. Debt crises are associated with adverse economic shocks and trigger political turnovers. Political turnovers generate defaults even without negative shocks.

This paper analyzes optimal foreign aid policy in a neoclassical growth framework with a conflict of interest between the donor and the recipient government. Aid conditionality is modeled as a limited enforceable dynamic contract. We define the contract to be selfenforcing if, at any point in time. the conditions imposed on aid funds are supportable by the threat of a permanent aid cutoff from then onward. Quantitative results show that optimal self-enforcing conditional aid strongly stimulates the developing economy and substantially increases welfare. However. aid effectiveness comes at a high cost: to ensure enforceability. less benevolent political regimes receive permanently larger aid funds in return for a less intense conditionality.Foreign aid has been a substantial source of income in developing economies. As an example consider the case of Africa: on average aid funds amount to 11% of recipient's GDP.1 The stated intention of development assistance programs is to reduce poverty and to promote economic growth. However, the stagnating growth pattern in African countries calls the effectiveness of aid into question. 2 This paper analyzes optimal foreign aid policy in a neoclassical growth framework with a conflict of interest between the donor and the recipient government. We take into account that, instead of implementing economic policies that coincide with the donor's intention, the recipient government may follow 'bad' policies and use aid funds e.g. to assist political supporters or to finance military interventions. To prevent the government from doing so, it has become a common donor policy to impose conditions that specilY how foreign aid funds should be allocated. However, since the recipient country is sovereign, its government may not be willing to keep the conditions. The focus of this paper is to analyze the optimal design of incentive compatible aid conditionality. We follow the recent literature on limited commitment in dynamic macroeconomic settings and describe aid conditionality as an imperfectly enforceable dynamic contract between the donor and the recipient country.3 To ensure that the recipient government coop-